• July 29, 2014

HandshakeUnder Minnesota law, every contract includes an implied covenant of good faith and fair dealing” (emphasis added).  But under Minnesota law, just what is “an implied covenant of good faith and fair dealing”? What are we agreeing to impliedly???

It’s another trick question brought to you by Minnesota Litigator! Could it be that every contract governed by Minnesota law has an invisible promise (that is, a “covenant”) but no one knows what it is? Yep. And there is a good reason for that.

Some Minnesota courts have suggested that this “implied covenant” is limited to claims of “unjustifiable hindrance of performance.” So, for example, one can imagine Seller of land enters into a contract for Buyer 1 to buy the land. Then Seller finds Buyer 2 who wants to buy the same land but is willing to pay more money. So Seller purposefully delays Buyer 1’s closing, intentionally makes it difficult for Buyer to close the deal under the timing required in the purchase agreement, and effectively forces Buyer 1 to breach the agreement, excusing performance by Seller.

In a sense, Buyer 1 would not have a breach of contract claim against Seller for Seller’s failure to sell Buyer 1 the land because Buyer 1 breached the contract herself by failing to close the transaction in time. (Also, maybe the contract did not expressly require that Seller make the closing at a specific convenient time and place so Buyer 1 could not point to express contractual provisions that Seller breached.) I believe that most of us agree that the law has to step in in such cases because Buyer 1’s “performance” of the contract was intentionally hindered by Seller. It would seem unfair, unjust, and inefficient to allow Seller to weasel out of contractual obligations in this way.

This is the classic “breach of the implied covenant of good faith and fair dealing” and, in a case like this, it seems quite clear that Buyer 1 would have claims of breach of contract and/or breach of the covenant of good faith and fair dealing against Seller (though she could only recover under one or the other claims and not make a double recovery, of course).

But let’s take a “non-classic” case where someone might cast a breach of contract claim alternately as a breach of the implied covenant of good faith and fair dealing:

Seller agrees to sell Widget to Buyer, providing that Buyer must come to Seller’s property to pick up Widget. Buyer arrives at Seller’s land only to discover that Widget sits at the bottom of a 10 foot-deep hole. Buyer refuses to pay for Widget. Seller sues Buyer for breach of contract.

Can Buyer counterclaim for “breach of the implied covenant of good faith and fair dealing”?

Seller did not exactly “hinder” performance. Seller just added a condition that Buyer had neither anticipated nor contracted against. It never occurred to Buyer that this was part of the deal. Perhaps a court would be justified in reading into the agreement an unwritten part that Widget would simply be available for pick up at ground level?

In fact, don’t almost all contracts include unwritten “implied” provisions? Shouldn’t our courts read such provisions into contracts when a party unreasonably denies implicit understandings?

Would it make a difference in the Ditch Widget case if Seller simply failed to appreciate that the hole would pose a problem for Buyer rather than Seller knowingly concealing the fact of this inconvenience? What if the Widget was simply inconveniently located at the back of the property rather than in a hole and Buyer balked? How far should a court go to read unwritten provisions into contracts?

These last questions, this uncertainty and ambiguity is why principles such as the “implied covenant of good faith and fair dealing” defy clarity.

Very few contracts ever, if any, can cover every last possible ambiguity. When Party A and Party B enter into an agreement, therefore, it will always have holes. We do not want there to be some bright-line fast lane into court, a cause of action for breach of implied covenant of good faith and fair dealing, every time parties disagree on some implicit (or nonexistent?) term. On the other hand, under certain circumstances (let’s say the “Widget Ditch” was 60 feet deep), it seems appropriate for the law to step in and read in a condition where it would be an injustice not to.

The better court decisions on the breadth of the implied covenant, in my view, offer a somewhat broader interpretation of the implied covenant than limiting it to cases of “unjustifiable hindrance of performance.”  While our courts need to be careful not leap at the request to fill every contract pothole, “fair dealing may require more than honesty” and “a complete catalog of types of bad faith is impossible”  (quoting from The Restatement (2d) of Contracts, § 305).

(Here, in my opinion, is the most amusing example that the Restatement sets out — an example of a breach of the implied covenant of good faith and fair dealing without any aspect of hindering the performance of the counter-party’s obligations):

A contracts to perform services for B for such compensation “as you, in your sole judgment, may decide is reasonable.” After A has performed the services, B refuses to make any determination of the value of the services. A is entitled to their value as determined by a court.

(A is probably an idiot for entering into such an agreement but B is a jerk.)

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